Pawns or rooks? Local government responses to economic shocks, 1977-2011

Michael CrawInstitute of Government

University of Arkansas, Little Rockmccraw@ualr.edu

Research question

• Local governments have an ideal position to respond to local needs during a recession

• But CW holds that local governments also face significant economic constraints that limit responsiveness

• What explains variation in local government expenditures over differing economic conditions?

Theory 1: Local governments as pawns

• Local government own-source revenues are strongly tied to the state of the economy

• State intergovernmental revenues similarly are tied to the state of the regional/national economy

• Implication: local government revenues, and hence expenditures, may decline as tax base declines

Theory 2: Local governments as rooks

• Local governments face significantly increased demands for services during times of economic distress

• Hence seek additional revenue streams when tax base falls in order to continue services

• Demand for and participation in intergovernmental revenues may therefore increase as tax base falls, offsetting declining own-source revenues

Total and general local revenues, 1977-2011 (2009 $000s)

19771978

19791980

19811982

19831984

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

2011

-200000000

0

200000000

400000000

600000000

800000000

1000000000

1200000000

1400000000

1600000000

1800000000

Total revenue

General revenue

Utility revenue

Liquor stores

Insurance trusts

Reve

nues

($20

09 0

00s)

Source: Census of Governments Annual Government Finances Survey http://www.census.gov/govs/local/

Sources of local general revenues, 1977-2011 (2009 $000s)

19771978

19791980

19811982

19831984

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20110

50000000

100000000

150000000

200000000

250000000

300000000

350000000

400000000

450000000

500000000

Federal IGRs

State IGRs

Property taxes

Sales taxes

Individual income tax

Corporate income tax

M.V. license tax

Other taxes

User fees

Misc. gen. revenueREve

nues

(200

9 $0

00s)

Source: Census of Governments Annual Government Finances Survey http://www.census.gov/govs/local/

Sources of local general revenue, 1993 and 2009

4%

34%

30%

6%2%

0%

0%

2% 15%

7%

1993

Federal IGRsState IGRsProperty taxesSales taxesIndividual income taxCorporate income taxM.V. license taxOther taxesUser feesMisc. gen. revenue

4%

33%

29%

6%2%

0%

0%

2%

16%

7%

2009

Federal IGRsState IGRsProperty taxesSales taxesIndividual income taxCorporate income taxM.V. license taxOther taxesUser feesMisc. gen. revenue

Source: Census of Governments Annual Government Finances Survey http://www.census.gov/govs/local/

Local direct general expenditures, 1977-2011 (2009 $000s)

19771978

19791980

19811982

19831984

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20110

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000Direct general expenditures

Education

Social services

Transportation

Public safety

Environment

Administration

Interest

Gen. expend, NEC

Expe

nditu

res (

2009

$00

0s)

Source: Census of Governments Annual Government Finances Survey http://www.census.gov/govs/local/

Local direct general expenditures by function (excluding education), 1977-2011 (2009 $000s)

19771978

19791980

19811982

19831984

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20110

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

Social services

Transportation

Public safety

Environment

Administration

Interest

Gen. expend, NEC

Expe

nditu

res (

2009

$00

0s)

Source: Census of Governments Annual Government Finances Survey http://www.census.gov/govs/local/

Distribution of direct general expenditures by function, 1993 and 2009

43%

14%

6%

10%

11%

5%

5%5%

1993

EducationSocial servicesTransportationPublic safetyEnvironmentAdministrationInterestGen. expend, NEC

43%

12%

6%

11%

11%

5%

4%6%

2009

EducationSocial servicesTransportationPublic safetyEnvironmentAdministrationInterestGen. expend, NEC

Empirical questions

• Pawns, rooks or both?– To what extent do local general expenditures

respond to changes in own source revenues, state intergovernmental revenues, and GDP?

– To what extent do local own source revenues and state intergovernmental revenues respond to changes in local general expenditures?

• Data source: Census Bureau’s annual summary of state and local government finances

Methods

• Endogenous variables:– Direct general expenditures– Own source revenues– State intergovernmental revenues

• Exogenous variable: GDP• All variables differenced to become I(0)• Testing criterion: Granger causality• Statistical model: vector autoregression

Results: Equation 1Coefficient z-score p-value

Equation 1: Direct general expenditures

Direct general expenditures (differenced)

Lag 1 0.02 0.06 0.95

Lag 2 -0.28 -1.95 0.052

Own source revenues (differenced)

Lag 1 0.68 3.74 0

Lag 2 0.36 1.67 0.095

State IGRs (differenced)

Lag 1 0.86 2.2 0.028

Lag 2 0.59 1.48 0.14

GDP (differenced)

Lag 0 -10,295.50 -1.5 0.133

Lag 1 17,838.06 1.97 0.049

Lag 2 13,116.78 1.28 0.199

Constant -2743667 -0.75 0.452

Results: Equation 2

Equation 2: Own-source revenues Coefficient z-score p-value

Direct general expenditures (differenced)

Lag 1 -0.15 -0.65 0.517

Lag 2 -0.04 -0.27 0.787

Own-source revenues (differenced)

Lag 1 0.32 1.91 0.056

Lag 2 0.19 0.95 0.341

State IGRs (differenced)

Lag 1 -0.42 -1.14 0.252

Lag 2 -0.09 -0.24 0.811

GDP (differenced)

Lag 0 4,883.60 0.76 0.446

Lag 1 22,898.17 2.7 0.007

Lag 2 22,657.36 2.37 0.018

Constant 5,592,734.00 1.64 0.102

Results: Equation 3Equation 3: State IGRs Coefficient z-score p-value

Direct general expenditures (differenced)

Lag 1 -0.09 -0.8 0.425

Lag 2 -0.14 -2.07 0.039

Own-source revenues (differenced)

Lag 1 0.10 1.19 0.233

Lag 2 0.18 1.74 0.082

State IGRs (differenced)

Lag 1 0.32 1.73 0.084

Lag 2 0.44 2.27 0.023

GDP (differenced)

Lag 0 6,201.97 1.88 0.06

Lag 1 9,152.55 2.09 0.036

Lag 2 3,418.68 0.69 0.488

Constant -1,608,061.00 -0.91 0.361

Granger causality tests

• Equation 1: Direct general expenditures– Own-source revenues: p < 0.001– State IGRs: p = .028

• Equation 2: Own-source revenues– Direct general expenditures: p = 0.744– State IGRs: p = 0.503

• Equation 3: State IGRs– Direct general expenditures: p=.054– Own-source revenues: p= .089

Conclusions

• Local governments have traits of pawns:– Lagged own-source revenues and state IGRs Granger cause

expenditures– Own-source revenues and state IGRs in turn are caused by

GDP– Direct general expenditures fail to Granger cause own-

source revenues• But they may be rooks in the intergovernmental arena:– Direct general expenditures may Granger cause state IGRs:

a drop in local expenditures may be followed (with a lag) by an increase in state IGRs